IKEA brand owner says higher wood and metal prices hit profit

STOCKHOLM (Reuters) - The owner of the IKEA furniture brand reported a drop in annual underlying profit on Monday, hit by higher wood and metal prices.

After decades of rapid growth, the world’s biggest furniture brand is battling to adapt to the rise of online rivals such as Amazon (AMZN.O) and made.com, while also trying to maintain its hallmark affordability amid rising raw material and other costs.

As part of an overhaul in 2016, design, in-house production and supply chain management transferred to brand owner Inter IKEA from IKEA Group, which owns most of the stores.

Inter IKEA said on Monday its net profit for the 12 months through August was 1.45 billion euros ($1.63 billion), compared with 912 million euros a year earlier, when the firm took 812 million in goodwill writedowns for the acquired businesses.

“If we took that out of the FY17 result, you get to a net result of 1.7 billion. So, we are actually dropping a bit,” Inter IKEA Chief Financial Officer Martin van Dam told Reuters.

Inter IKEA reported a 12 percent rise in net sales to 25.5 billion euros, but said costs - mainly for wood and metals - outpaced wholesale sales, and it had not passed them all on to franchisees.

“We see raw material and materials costs increasing. We see tariff challenges. We see salaries gradually increasing. And by that definition, we get an in-price onto our products that is challenging,” van Dam said in an interview.

“It would be super easy to charge the retailers with that and call it a happy day, but that doesn’t work, because we want to commit ourselves to the totality of IKEA of low pricing. And by that definition we have to give up margin to be successful collectively in a franchise dimension,” he said.

MARGIN SQUEEZE

Inter IKEA produces around 10 percent of the range and sources the rest from external suppliers. It raised prices to franchisees by 0.2 percent, but took a 1 percent hit to its gross margin on those sales.

Investments in the supply chain, range development and in new store concepts and services also weighed. IKEA has been opening city-center showrooms to try to appeal to a growing number of shoppers reluctant to travel to its big out-of-town warehouses, while also offering services such as furniture assembly.

“Also, with online sales growing we are making changes to our supply chain set-up to accommodate for alternative ways to deliver IKEA products to end customers. In this we have to become more efficient still,” van Dam said.

He said IKEA was having to adapt as well to tariffs, such as those imposed by the United States, its second-biggest market, on goods imported from China, where it sources some products.

“We’re not at all in a position where it’s clear,” he said, adding: “We could mix it differently ... We could produce exactly the same in two locations, just ship it to different locations.”

Inter IKEA reported in October that franchisees sold 38.8 billion euros of goods and services in the 12 months through August, up 5 percent in local currencies.

FILE PHOTO: An IKEA worker hands out catalogues at the entrance to an IKEA store in Madrid, Spain, October 10, 2018. REUTERS/Susana Vera/File Photo

The growth rate was roughly the same as the year before, but van Dam said retail sales were lower than expected.

There were 422 IKEA stores in more than 50 countries at the end of August, owned by 11 franchisees that pay 3 percent of revenues to Inter IKEA.